Bank earnings as a demand leakage

All unspent income is called a ‘demand leakage’ as it means the output can’t get sold unless another agent spends more than his income. (by identity, not ‘theory’) And unsold output leads to cuts in output, cuts in employment, etc. etc. and down you go until some agent spends enough more than his income to offset the demand leakages. Invariably that agent is govt, as the automatic fiscal stabilizers increase the deficit. Of course they also work in reverse, providing an increasing headwind to the economy as it grows, via higher revenues and lower transfer payments. Like what’s happening now, which has brought the deficit down dramatically over the last few of years..

Anyway, when a bank has income and pays it out as shareholder income, that’s not a demand leakage. And if the shareholders don’t spend their income, that is a demand leakage. etc.

But if a bank earns income and doesn’t pay it out or spend it, but instead lets its equity capital increase, that is a demand leakage.

So what’s happening in general is top line growth is pretty much flat, with earnings not being spent, but instead adding to net worth and therefore the earnings are demand leakages. This includes the housing agencies/banks who are now turning over their incomes to govt.

Remember this from the Fed?

The Automatic Stabilizers: Quietly Doing their Thing

By Darrel S. Cohen and Glenn R. Follette

Abstract: This paper presents theoretical and empirical analysis of automatic fiscal stabilizers, such as the income tax and unemployment insurance benefits. Using the modern theory of consumption behavior, we identify several channels–insurance effects, wealth effects and liquidity constraints- -through which the optimal reaction of household consumption plans to aggregate income shocks is tempered by the automatic fiscal stabilizers. In addition we identify a cash flow channel for investment. The empirical importance of automatic stabilizers is addressed in several ways. We estimate elasticities of the various federal taxes with respect to their tax bases and responses of certain components of federal spending to changes in the unemployment rate. Such estimates are useful for analysts who forecast federal revenues and spending; the estimates also allow high- employment or cyclically-adjusted federal tax receipts and expenditures to be estimated. Using frequency domain techniques, we confirm that the relationships found in the time domain are strong at the business cycle frequencies. Using the FRB/US macro-econometric model of the United States economy, the automatic fiscal stabilizers are found to play a modest role at damping the short-run effect of aggregate demand shocks on real GDP, reducing the “multiplier” by about 10 percent. Very little stabilization is provided in the case of an aggregate supply shock.

European Retail Sales Decline Most in Nine Months

‘market forces’ are driving national deficits higher via automatic stabilizers which drives the euro lower to the point exports rise sufficiently to turn the tide, but that needs to happen before the rising deficits result in defaults.

On Thu, Apr 8, 2010 at 6:04 AM, La-Toya Elizee wrote:

European Retail Sales Decline Most in Nine Months

Revamped ECB Lending Rules May Cause Greece Pain

German Factory Orders Unchanged After January Jump

French Trade Deficit Widened in February on Imports

Capital flight squeezes Greek banks

Italy needs deep reform, say employers

Spain’s Industrial Output Falls More Than Expected in February

Federal Deficit as a % of GDP


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Looking very much like the automatic stabilizers turned the tide around year end, and subsequent fiscal adjustments are helping firm things up as well.

But there was a lot of work to do to add back the financial assets to the government lost during the surplus years of the late 90’s, so we may linger here a little longer than in previous cycles while the non govt sector’s net financial assets are restored to levels sufficient to support growth and employment.


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EU Daily | ECB sees ‘turning point’ in lending conditions


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Yes, central banks have finally managed to restore a degree of ‘market functioning’ after full year or more of ‘extraordinary measures’ which mainly served to demonstrate a lack of understanding of basic monetary operations.

Note that only after automatic stabilizers began to reverse the slide at year end did the lending environment begin to recover as well.

  • ECB sees ‘turning point’ in lending conditions
  • European Retail Sales Fall for 14th Straight Month, PMI Shows 2009
  • German Unemployment Total Rose in July as Job Cuts Continued
  • German July Retail Sales Decline at Slowest Pace in 14 Months
  • Ifo Sees More Jobs Lost Among German Machinery Makers, FTD Says
  • French Retail Sales Post Sharpest Drop in Four Months, PMI Says
  • Italy’s Retail Sales Fall as Job Cuts, Recession Curb Spending
  • Italian Banks Agree on One-Year Loan Moratorium, MF Reports
  • Spanish Consumer Prices Dropped by Record 1.4 Percent in July
  • Spain’s Recession Eased in Second Quarter, Central Bank Says
  • German Bonds Decline as Stocks Advance, Italy Auctions Debt


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Repost: Comments on Krugman


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Originally posted March 9th, 2009

Yes, but unspoken is the automatic stabilizers are quietly adding to the deficit with each move down, and the curves will cross and the economy start to improve when the deficit gets large enough, whether it’s the ugly way via falling revenues and rising transfer payments, or proactively via a proactive fiscal adjustment.

With income and spending turning mildly positive in January and other indicators such as the commodities also beginning to move sideways as the deficit passes through 5% before the latest fiscal adjustment kicks in, we may be seeing GDP headed towards 0 by q3 or sooner as most forecasters now predict. Unemployment, however, will continue to rise until real growth exceeds productivity growth.

Bottom line, there will be a recovery with or without a proactive fiscal adjustment. the difference is how bad it gets before it turns north.

Behind the Curve

by Paul Krugman

Mar 8 (NYT) — President Obama’s plan to stimulate the economy was a massive, giant, enormous. So the American people were told, especially by TV news, during the run-up to the stimulus vote. Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.

Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries  and suggest that the Obama administration’s economic policies are already falling behind the curve.


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